September 30, 2011

Paul Krugman, Pet of Big Government

September 30, 2011

The proponents of massive government subsidies to “green” energy have a huge problem on their hands. The Solyndra scandal is just so absurd, and the video footage of President Obama and Vice President Biden is just so hilarious, that only the most ideological can fail to smell a rat.

The reader will not be surprised, then, to learn that Paul Krugman, from his perch at the New York Times, thinks there’s nothing to see here. Krugman argues that hey, you win some, you lose some, and that the private sector makes bad investment decisions too—such as Pets.com.

“Haven’t written about this. But it is indeed a terrible scandal, because the private sector never ever puts money into ventures that end up failing:”

And then Krugman ended the post with a picture of the Pets.com sock puppet. His point, of course, is that there’s no scandal here, and groups like IER should drop the issue.

Although we shouldn’t read too much into a flippant blog post, Krugman isn’t some random guy off the street on these issues. He has repeatedly (e.g. here and here) called for massive government interventions into the energy sector, both for mitigating climate change and—more recently—because he thinks it will help the economy right now, to force businesses to spend money revamping their operations.

In case he genuinely doesn’t realize the issues, let’s walk through just why Solyndra is such a scandal. Krugman’s Pets.com analogy completely misses the point.

Government vs. Private Investment

The most obvious flaw with Krugman’s joke is that the investment in Pets.com was private money, and as such was voluntary. (For a synopsis of what happened with the failed venture, see the Wikipedia entry on Pets.com.) If Solyndra had gone to the private capital markets, raised half a billion dollars from people who thought Solyndra had a good business plan, and then it flopped—nobody would be talking about it.

No, the reason this issue affects the general public in the first place is that it was our tax dollars that were flushed down the toilet here, against our will. So yes, Dr. Krugman, there is definitely a higher bar you need to jump over, if you are going to be investing in projects with money taken from people coercively. If President Obama and Vice President Biden are going to decide how to invest $500 million of taxpayer money—money that by definition the private capital markets would not have allocated to Solyndra on the basis of their business model—then it’s pretty significant when it turns out Obama and Biden have no idea what they’re talking about.

More generally, we should remind Dr. Krugman of why we have private property in the first place. As Friedrich Hayek stressed, it’s precisely because the future is uncertain, and no single group of experts can have all the relevant information to make informed decisions about planning the economy.

One of the “jobs” of our economic institutions is to allocate resources into long-term projects for the future. These decisions—whether to build more wind turbines, whether to start building a new factory, whether to build a new refinery, etc.—depend on entrepreneurial judgment. Of course people in the private sector will make mistakes all the time. Yet the great virtue of a capitalist, private property arrangement is that it gets the incentives right. People will be rewarded or punished on the basis of their forecasting accuracy.

In contrast, when government officials override the market and invest in politically-favored projects, we have little reason to expect superior performance. Even if we accept the standard arguments for climate change and the “need” for a carbon tax at face value, it still wouldn’t follow that the federal government should be guaranteeing loans or providing other subsidies. At the very best, these mainstream economic arguments would have the government impose a corrective tax to “internalize the externalities” and get the market incentives right—then the government would let the profit and loss signals lead to the right investments. (It should go without saying that we at IER reject this conventional case for a carbon tax. But the point is, even on their own terms, the economists who worry about climate change have no business defending the boondoggle in Solyndra.)

It’s also worth pointing out that Solyndra isn’t unique. On these pages we have earlier discussed similar government privileges given to two other giant renewables companies, Abenbgoa and Iberdrola.

FBI Investigation

Yet besides his obtuse neglect of the fundamental distinction between private and government investment, Krugman’s analogy fails for another reason: As even many of his fans pointed out in the comments of his blog post, Krugman seems to think that the Solyndra scandal centers on its losses. Yet that’s not really it: The reason this has turned into such a political problem is the mounting evidence that Obama officials knew they were shoveling money into a sinking ship.

[Solyndra’s] solar panel factory was heralded as a centerpiece of the president’s green energy plan — billed as a way to jump start a promising new industry. And internal emails uncovered by investigators for the House Energy and Commerce Committee that were shared exclusively with ABC News show the Obama administration was keenly monitoring the progress of the loan, even as analysts were voicing serious concerns about the risk involved.

“This deal is NOT ready for prime time,” one White House budget analyst wrote in a March 10, 2009 email, nine days before the administration formally announced the loan.

“If you guys think this is a bad idea, I need to unwind the W[est] W[ing] QUICKLY,” wrote Ronald A. Klain, who was chief of staff to Vice President Joe Biden, in another email sent March 7, 2009. The “West Wing” is the portion of the White House complex that holds the offices of the president and his top staffers. Klain declined comment to ABC News.

Beginning in March, ABC News, in partnership with the Center for Public Integrity’s iWatch News, was first to report on simmering questions about the role political influence may have played in Solyndra’s selection as the Obama administration’s first loan guarantee recipient. Federal auditors had flagged the loan, saying some applicants had benefitted from special treatment.

To repeat, the Solyndra scandal is not simply a matter of the federal government wasting money on bad business ideas—the government does that all the time. Rather, Solyndra is “special” because the government managed to lose half a billion in taxpayer money even when its own analysts had given clear warnings beforehand. What is being investigated is whether the Department of Energy ignored its own protocols because of the special treatment given to Solyndra (which had made large campaign contributions and visited the White House many times).

So let’s go back to Krugman’s Pets.com analogy: If it turned out that Pets.com officials had raised money from outside investors on false pretenses, and had given sweetheart contracts to (say) suppliers of kitty litter at above-market prices, and then it turned out that Pets.com analysts had warned management that these contracts would blow up the company, yet the executives did it anyway because of kickbacks from the kitty litter vendors…then yes indeed, this would have been grounds for a lawsuit, and the government would start an investigation.

This isn’t a hypothetical supposition on my part. The public was shocked to learn that Goldman Sachs analysts internally referred to mortgage derivative products as “sh*tty” that they were selling to some of their clients, and in fact the government launched an investigation. So Krugman’s flippant analogy is wrong in multiple dimensions.

Conclusion

Krugman is wise to not write up a formal response on the Solyndra scandal, because he has no leg to stand on. Unless he wants to argue that in our current “liquidity trap,” wasting half a billion dollars will stimulate job creation, Krugman should probably just keep quiet on Solyndra from now on.